UK interest rates are at historically low levels, but according to recent reports they may start to rise later this year. You can see the effect of interest rates on mortgages, loans and credit cards, but how do they affect your life insurance?
Life Insurance companies finance their business by investing the premiums they collect on the financial markets to make sure they have adequate resources to pay out on claims. In 2015 the UK insurance industry held assets of 1.9 trillion pounds making them the largest group of investors in the markets. Much of the Life Insurers portfolios are made up of fixed income securities. What are they? Fixed income securities are investments, like Government Bonds or other corporate bonds, which pay interest or a dividend which is known in advance by the investor. This is good for Life Insurance companies as they can predict their income and have a clear idea of what money they will have available to meet claims and what premiums they need to charge on your policy.
With interest rates at such low levels over the last ten years Life Insurers, as long term investors, have adjusted their business expectations to allow for this low rate environment. With the potential for rates to now rise some insurance companies with lower returns on their existing investments, meaning they may have a shortfall that needs to be made up with increased premiums. They may also have to sell investments at a lower price and pay more to reinvest in higher returning bonds, again resulting in possibly increased premiums.
What does this mean for policyholders? That you should certainly be reviewing your life insurance cover regularly as there could well be improved benefits and better premiums from Insurers who have responded more quickly to changing market conditions and moved to provide better insurance products. With uncertainty the only certainty in the economy for the near future reviewing your life insurance regularly not only ensures you are getting best value for money but keeps your cover up to date and in line with changes in your personal circumstances.
I hope this helps you make an informed choice about your life insurance needs. I am always happy to review your specific circumstances so get in touch if you need some advice.